Dividing Debts in an Ontario Divorce: What Counts

Shared credit cards, a line of credit, a car loan or a mortgage can make separation feel frightening. Many people want to know whether they will be stuck with a debt their spouse ran up.

In Ontario, the starting point for property is equalization, and debts play a specific role in it. This article explains that role, and where the answer depends on facts a lawyer or accountant should review.

How debts fit into equalization

Net family property is the value of the property a spouse owns on the valuation date, minus debts and permitted deductions. It is never less than zero. The spouse whose net family property is smaller is entitled to one-half of the difference between the two.

In plain words, each spouse adds up what they own and subtracts what they owe. The two totals are then compared. Because the result cannot go below zero, a spouse whose debts are larger than their property is treated as having a net family property of zero, not a negative number.

On the property side of the calculation, RRSPs and pensions are counted as property. Some property is excluded, including gifts or inheritances from a third party received after the marriage (other than a matrimonial home), personal injury damages, life insurance proceeds, and property excluded by a domestic contract. The person claiming an exclusion must prove it.

The date matters

The valuation date is the earliest of several dates, including the date the spouses separate with no reasonable prospect of resuming cohabitation. Debts and property are generally measured as of that date, so a card balance on the day you separated is treated differently from spending afterward.

A declaration of nullity is one of the events that can fix the valuation date. For Family Law Act purposes, a spouse includes two persons who entered a void or voidable marriage in good faith, so equalization can still be available in that situation. If you are unsure which date applies to you, that is worth confirming early.

Whose name is on the debt

Equalization looks at each spouse's own net family property. Separate from that is what a lender can demand from you, which depends on the loan terms and whether you signed or co-signed. How a particular debt is affected by a settlement between you and your spouse depends on the loan terms and your situation, so it is worth confirming with a lawyer.

• Joint debts: when both names are on an account, what the lender can collect from each of you depends on the loan terms, so it is worth confirming with a lawyer.
• Debts in one name: usually counted against that spouse in the calculation, but you should still list them.
• Debts tied to an asset, such as a mortgage or car loan: generally considered alongside the asset's value.
• Tax debts and business debts: these often need an accountant's input.

Disclosure, agreements and fairness

A separation agreement can cover property, support and parenting, but it is unenforceable unless it is in writing, signed by the parties and witnessed. A court may set aside a domestic contract, or a provision in it, if a party failed to disclose significant assets, debts or other liabilities, or did not understand its nature or consequences.

If equalizing would be unconscionable, the court may award more or less than half the difference. That is an exception, and whether it applies depends on the facts.

If a family arbitration is used, the award is enforceable only if, among other conditions, each party received independent legal advice before making the arbitration agreement.

Where a pension is part of the settlement, a spouse may apply for an immediate lump-sum transfer from the plan only if it is provided for by a court order, a family arbitration award or a domestic contract. An order, award or contract has no effect to the extent it gives the eligible spouse a lump sum of more than 50 per cent of the imputed value of the pension.

What to do next

A simple divorce application is for divorce only. No other claim, such as support or property, can be made in it. Debts and property therefore need to be dealt with outside that simple application, and how to do that depends on your situation, so it is worth confirming with a lawyer. Financial statements are part of that process: Form 13 is used for support claims without property claims, and Form 13.1 is used for property claims, with or without support.

• Gather statements for every loan, card, line of credit and mortgage showing the balance on or near your separation date.
• Note whose name is on each account and who has been making payments.
• Avoid closing or draining accounts without advice.
• Ask your lender what is needed to remove a name or refinance.
• Mind the deadline to claim equalization, which can run from separation or divorce.
• Speak with a lawyer before signing any agreement.

Frequently asked questions